China-U.S. trade conflict

Summary: Free trade is about more than just about low tariffs. It is also about predictability, and the EU must not allow Trump to introduce arbitrary tariffs at will.

Freetrade is about more than just about low tariffs. It is also aboutpredictability, and the EU must not allow Trump to introduce arbitrary tariffsat will.

The U.S.has committed under the framework of the World Trade Organization not toincrease its tariffs above a certain tariff rate, the so-called “bound tariff”.This tariff differs a bit for different goods, but on average for iron andsteel products, the bound tariff for the U.S. is only 0.3 percent. There ishence very little doubt that the proposal to put a global tariff on steelimports of 24 percent is violating the U.S.’s commitments, even if Donald Trumpclaims “national security” as a motivation.

Theproblem with WTO rules is that the organization cannot enforce the rules byitself. For a perpetrator to be brought to justice, first, another country hasto bring a complaint before the WTO dispute settlement system. Second, thiscountry must be willing to retaliate against the country having violated therules: winning a WTO dispute only gives one the right to retaliation.

Theserequirements mean that only a large and powerful trading party can successfullychallenge the United States. To win a WTO dispute requires significantresources to file and argue a case. And in order for the retaliation to hurtthe U.S., the opposing party needs to be a significant market. If Liberia wereto put tariffs on U.S. imports, American companies would hardly notice.

As far aswe know, the EU Commission is not planning to violate any WTO rules. Instead itis planning to use the WTO’s framework to retaliate against the U.S. This mightinclude bringing a dispute before the WTO (which would likely result in aruling that the EU is allowed to retaliate with certain tariffs), or followingthe example of South Korea, retaliating based on a right won in former disputesbut not yet applied, or applying certain safeguard measures which can beenacted at short notice if its industries are faced with material damage.

Goingdown this road might look like escalating an irrational trade war. Yet in factthe EU is merely enforcing global trade rules. In the past, bringing casesbefore the WTO by large trading partners has pushed countries to obey moreclosely the spirit and letters of the rule-based, free trade system. Withoutthe U.S. having brought the famous “Banana” case before the WTO, for example,the EU might today still be running its old absurd multi-tier quota system forbanana imports. Retaliating against U.S. steel tariffs is hence contributing tothe global public good of a rule-based, liberal trading system.

It is notclear whether the information about which U.S. products will potentially betargeted has been leaked to the press, or whether the EU Commission did notintend it to become public. However, such a leak would be part of a rationaland effective retaliation strategy: Without actually creating damage toconsumers.